Cash flow and managing growth are a key to any business. A couple weeks ago, I introduced 12 Ways to Fund Your Business Part 1. Last week I discussed Bootstrapping and Customers and Vendors to help fund your business. What are some other safe ways to add cash to your business?
Level 1 funding opportunities are low risk and highly recommended for any business. Level 2 opportunities are more expensive and a bit riskier but could be necessary in high growth situations. Finally, level 3 should be considered only after looking at options in levels 1 and 2.
|Level 1||Level 2||Level 3|
|1. Bootstrapping||5. Personal Loans||10. Asset Based Lending|
|2. Customers and Vendors||6. SBA Loan||11. Factoring|
|3. Smart Leasing||7. Private Equity||12. High Interest Credit Cards|
|4. Bank Line of Credit||8. Government
|9. Mezzanine Financing|
This week, I am focusing on Smart Leasing and Bank Line of Credit.
In business, it can make sense financially to lease vehicles and machinery instead of outright owning them. I would suggest not leasing small equipment, such as computers, because the hassle in the long run is not worth it.
Here are reasons why leasing is better.
- Leasing vehicles and equipment offers a larger tax deduction. The tax deduction for owning a vehicle is limited to annual depreciation allowances that are typically less than the annual lease payments that are deductible when leasing a vehicle. The article “Buy or Lease Your Next Business Vehicle” offers more of an explanation.
- In speaking with Chris Romanelli with Enterprise Fleet Management, he says leasing is better when organizations want to have a proactive replacement schedule with a lower operating expense structure. Since equipment gets abused and technologies change frequently, many organizations look for a quicker rotation of assets to take advantage of technology changes. With all the safety features in vehicles, this can be appealing.
Bank Line of Credit
One good rule of thumb is to apply for a Line of Credit before you need it. If you come into a cash crunch, it can become more challenging to get a Line of Credit. Why would I put the Line of Credit in such a low risk category? All businesses deal with seasonality, fluctuations in the business, and growing pains. I would not suggest using a Line of Credit that you can’t foresee paying off in the next three months. Below are the best ways to use a Line of Credit.
- Your business is growing and you need to pay your vendors, employees, and contractors for a project before receiving payment from a client. If you are working with a large customer, it may be hard to negotiate terms such that they pay in less than 60 days. In this case, you may have a cash challenge, but it is only short term.
- You have seasonality in your business for revenue, but your expenses are consistent. I would argue you should ultimately plan for this in your financial plan, and I strongly believe a good fractional CFO will help you successfully navigate through the challenges of seasonality. In the short term while you are a young organization, a slow quarter could put you in a cash crunch. If you feel confident that in the next 3-6 months you will come out of the slow period, then a Line of Credit may be worth it. Be sure to have a reasonable forecast with historical support for your forecast. For example, if you know that sales historically increase 30% in October-December, then you can forecast your cash flow. This means you should plan to pay off the Line of Credit in Q1 of the next year.
- Another reason could be as simple as a client paying slowly due to not receiving the invoice or some temporary challenge. In this case, you might expect them to pay in 30 days, but they pay in 60 days. A Line of Credit can lower the stress of making your essential expenses like payroll.
Once you have considered bootstrapping, customer invoicing, and vendor payment options, you should also consider getting a Line of Credit and/or leasing any vehicles and other large equipment. Once you have reviewed all of these options, you should also look into funding your business through personal loans, SBA loans, private equity funding, government grants, or mezzanine financing. Next week, we will look further some of these types of funding.